Real estate developers have scaled down projects still in the design phase and have significantly slowed down construction of projects already under way to postpone delivery until the markets recover.

The market for luxury villas, the upper end of the market has slowed down dramatically in Bahrain, even if not as drastically as in Dubai, said Mohammed Khalid Alsayed, chief executive of Ithmaar Development Company, owned by Bahrain-based Islamic lender Ithmaar ITHMR.BH.

There will be a restructuring of the real estate market ... some of the main developers will go for affordable housing.

The Gulf Arab region saw a property boom fuelled by a six-year oil boom that ended last year, and Bahraini developers had concentrated on the lucrative high-end, by building luxury residential developments off the island's coastlines.

Bahrain, the smallest Gulf Arab economy with a population of just over 1 million, is a small oil producer and its government has not had enough funds to address the shortage in low-income housing caused by population growth and an influx of Asian workers.

Alsayed estimated the accumulated lack of low-end housing at 40,000 units, increasing by between 5,000 and 6,000 units per year.

Ithmaar in June established Naseej, a developer with issued capital of 180 million Bahraini dinars ($477.6 million) that focuses entirely on affordable housing.

Alsayed said Ithmaar Development and Naseej were part of a consortium that has submitted a preliminary bid for a government tender for over 2,000 low-income units to be built under a public-private partnership scheme.

He said the government was currently drafting plans for the construction of 14,000 low-income units.

LOCAL INVESTORS

At Diyar Al Muharraq, a 10 square kilometre development off Bahrain's northern coastline, construction has slowed down due to the dips in the market, but between 500 and 1,000 affordable housing units will be delivered next year, said Daniel Chatley, its development director.

We're catering to the local market, he said, adding that some 4,000 out of the project's homes to be built over the next few years are designed for the low-income market.

The Bahraini real estate market did not see the rush of speculative money inflows that the region's tourism and services hub Dubai experienced, with investment mostly made by local, Saudi and Kuwaiti investors.

The rapid rise in rents has levelled off, we're now in a phase where everybody is waiting for the next move, said Mike Williams, senior director at CB Richard Ellis.

Williams said there was still an oversupply of units expected to come to the high-end residential market. CB Ellis estimates there will be some 60,000 residential units delivered to the market until 2013, out of which 38,00 will be government-sponsored low-income housing units, he said. (Reporting by Frederik Richter; Editing by Natsuko Waki and Rupert Winchester)